India's Interest Rate Gap With G7 Economies Key To Attracting Foreign Debt Capital: YES Bank

New Delhi, Oct 23 (KNN) Maintaining an adequate interest rate differential between India and major developed economies has emerged as an important consideration for monetary policy, as the Reserve Bank of India (RBI) faces rising inflation risks, according to a report by YES Bank.

The report said the interest rate gap with G7 economies is relevant for attracting foreign debt capital, particularly as the US Federal Reserve is expected to continue its rate-hiking cycle.

External member of the RBI's Monetary Policy Committee (MPC), Saugata Bhattacharya, noted, “maintaining a certain gap between India and G7 interest rates is important for attracting debt capital flows,” ANI reported.

The assessment comes amid growing concerns over the domestic inflation outlook and the possibility of higher input costs being passed on to consumers. The October MPC meeting minutes showed that the RBI's inflation projection for the third quarter of FY27 had reached 6 per cent, the upper limit of its 2-6 per cent tolerance band.

YES Bank said September inflation data indicated a broader increase in prices, with both core inflation and core inflation excluding precious metals rising. The report also pointed to higher household inflation expectations and signs of businesses passing on increased input costs.

Growth Resilient, Inflation Risks Persist

Bhattacharya noted that demand pressures remained subdued, although the gap between actual economic activity and potential output appeared to be narrowing.

India's GDP grew 7.8 per cent in the first quarter of FY27, supported by private consumption, stronger exports and continued momentum in the services sector.

The report said some MPC members favoured a timely policy response to prevent current price pressures from spreading further across the economy. Higher energy prices, supply-chain disruptions and El Niño conditions were also identified as risks to the growth outlook.

YES Bank Expects 50 Bps Rate Hike

Based on domestic inflation risks and global monetary policy developments, YES Bank expects the RBI to raise the policy repo rate by a cumulative 50 basis points, comprising a 25-basis-point hike in December and another 25-basis-point increase in February.

The projection represents the bank's assessment and not an announced RBI decision. The report underscores the challenge for monetary policymakers in containing inflation while maintaining an interest rate differential that supports foreign debt capital flows.

(KNN Bureau)